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Ethics Keeps Up With New World Order

CPAs practicing in nontraditional structuressuch as American
Expresswill not be working in a professional ethics vacuum. New
guidance from the professional ethics executive committee (PEEC)
clearly spells out the applicability of the Code of Professional
Conduct to CPAs in any type of entity and requires public accountants
to adhere to independence standards no matter where they practice.

PEEC describes a fictional parent company called PublicCo (see
chart, above), which owns a number of financial services companies.
PublicCo buys some accounting firms, andas described in Alternative
Structures and Government Accountants ( JofA, June98
)some CPAs in the purchased firms offer consulting and other
nonattest services to clients on behalf of their new employers. Audit
partners in the purchased firm, however, form Newfirm to continue to
offer client attest services. These partners own a majority of Newfirm
and may lease employees, office space and back-office functions such
as billing from PublicCo. But how will this new practice structure
maintain its independence?

For example, PEEC recognized a possible problem when owners of
Newfirm had to work with a direct superiora senior manager at the
professional services subsidiary (see chart). The new guidance
subjects such managers to the same independence requirements as a firm
member. Also, Newfirm cannot accept an attest client that has a
material investment in PublicCo or exercises significant control over
it.

According to Ellen Goria, a senior technical manager in the AICPA
professional ethics division, the language in the interpretation is
similar to that in the exposure draft Omnibus Proposal of
Professional Ethics Interpretations and Rulings , issued in
April 1998. The final guidance is in Official Releases, page 82.

Other Omnibus issues The ED also covered other provisions, which were approved
earlier and can be found in the December 1998 Journal in
Official Releases, page 147, and at the professional ethics Web pages,
www.aicpa.org/members/div/ethics/index.htm
. Of particular interest to government auditors is a provision
that redefines client to include certain federal, state and local
government entities that meet certain specified criteria. If the
government auditor is independent under code rules, he or she can
issue GAAS reports just like any public accountant. This and other
provisions also were adopted relatively unchanged from the ED, says
Goria.